Why The Banks Went Broke Making Money From Mortgage Loans

The banking crisis raises many questions. You wonder how the banks have said billions of dollars of assets of real estate mortgages could go bankrupt? And especially, how a crisis in mortgage banking to become a global financial crisis that affects us all?

The most fundamental is the thirst for profits. But greed alone is not enough. The banking crisis that began in 2008 due to a system that combines both greed and privilege. What are the privileges of the Bank created the opportunity for huge profits? Big banks money is that privilege can create money from nothing. Each time a bank creates a new mortgage, the bank creates more money.

Banks have legal statutes that allow them to earn money with money from their depositors. In simpler terms, the applicants put their money in the bank. The bank can use these deposits to loans to persons other than mortgages.

The most powerful advantage of this privilege is that banks can make multiple loans under the same deposits. Can provide and how much should be maintained as an asset is governed by the rules of the banks of the Federal Reserve. While greed is the motivation, the bankers need to plunge the greed of the banking system in crisis. The bankers took advantage of changes in banking laws that allowed banks to merge traditional banking venture with the investment bank.

Have you seen the classic Disney film “Fantasia”? In “The Sorcerer’s Apprentice”, cocks young apprentice in magic can not control. Something very similar happened with the banks.

When you start with the legal privilege of banks to make money from nothing, and then combine it with excessive greed, the banking laws changed and easing government regulations, it is easy to see how the whole situation could escape control.

The greed for more profit, why the banks started to lend for mortgages that have never been funded before. They used the standards of new loans as “loans” subprime “and” no-doc “loans. The subprime loans are typically offered to borrowers with poor credit at high interest rates. No loan doc represent “no documentation” loans that do not require the kind of careful verification of income, credit history and ability to pay that mortgage lenders typically required.

Proper names are an indication that banks were willing to grant loans. Why such a risk that the mortgages? They made subprime loans because they had no intention of keeping. They made their profits from the establishment of loans, rather than maintain them. After creating loans, sold these subprime mortgages to other banks. Then the mortgages were securitized.

Securitization means the mortgage notes together and then offered to investors as securities backed by mortgages. When a bank offers bond investors, is to borrow money based on assets. These values are based on subprime mortgages posed a double problem.

Like many of the values given bad mortgages, banks have been collecting mortgage payments sufficient to satisfy its obligations to bondholders. When borrowers started to default on their mortgage payments, banks could not raise enough money to pay investors who bought bonds in mortgage securities based on subprime loans.

Thus, banks with billions of dollars of mortgages on the books have been billions of dollars in debt. While greed is at the heart of the banking crisis, we can not regulate greed. The real cause of the banking crisis is that banks have used their banking privileges and participate in risky behavior with money from their depositors.